LANDLORDS AWAIT FULL “RETURN TO OFFICE”
The office market suffered a mild Covid relapse in the first quarter as companies shed 550,126 SF of space. It was the biggest three-month retreat in a year. It follows Q4’s strong net absorption total of 610,486 SF, the second largest quarterly gain in five years.
The weakness is confounding hopes that vaccine availability, plunging Covid infection rates and corporate America’s “return to office” plans would begin to reverse the contraction now totaling 2.7 million SF since the first quarter of 2020. By this fall a clearer picture should emerge of the prevalence and effects of hybrid working arrangements brought about by Covid-19.
The countywide vacancy rate increased sixty basis points in Q1, settling at 13.9%. By comparison, during the financial crisis in 2010 the vacancy rate peaked at 18.7% in 2010.
Demand is mixed. Vacancy rates in West County and North County, 7.1% and 9.2% respectively, have remained in single digits since Covid hit. Moreover, in West County asking lease rates are at a record $2.53 per SF, up 12.2% since early 2020. Additionally, the base inventories in North and West county have remained stable, while the remaining three submarkets added 13 buildings totaling 1,070,270 SF since early 2020.
Hit hardest by the pandemic are Class A buildings. Premium space accounts for 42% of the county’s 117.6-million-SF inventory but represents 76% of negative net absorption since Q1 2020. Average asking rents have declined 8.2%, but when free rent and tenant improvement allowances are factored in, effective rents can be significantly less.
Among Orange County’s five submarkets only South County reported first-quarter tenant growth. There was 99,518 SF of net absorption in the 27.3-million-SF submarket that drove down the vacancy rate 40 basis points to 14%. Average asking rents are $2.79 per SF, down 6% since the lockdown.
Net absorption in the 43.8-million-SF Airport submarket was in the red by 270,173 SF in the first quarter. The vacancy rate rose 60 basis points to 16.9%, the county’s highest.
Tenants in the 22.5-million-SF Central County submarket shed 266,484 SF of space in the first quarter combined with delivery of a new 69,500 SF building to drive up the vacancy rate 150 basis points to 14.2%.
The largest new lease in Q1 was signed by Cap Diagnostics for 53,980 SF in the Irvine Spectrum at $2.15 per SF triple net. A renewal on 127,750 SF by Carrington Real Estate Services at 1600 S. Douglass Road, Anaheim, was the largest lease transaction in Q1.
UBS Wealth Management’s $36.8-million sale of 500 S. Main Street, Orange, was the largest trade. The 161,000-SF building was acquired by Lincoln Property Company. The most paid for office space was $419 per SF for 7 Corporate Park, a 37,177-SF low-rise building in the Airport submarket.
FORECAST
The overall economic outlook improved in Q1 among local business executives answering a quarterly survey by economists at Cal State Fullerton economists. Nearly a quarter of those surveyed expect supply shortages to last more than one year.
